Chapter 8 - Contribution & Subrogation

Question 1

8 - Contribution & Subrogation

1. When does contribution apply?

Answer 1

When more than one policy covers the same loss or liability.

Question 2

8 - Contribution & Subrogation

2. When does subrogation apply?

Answer 2

When the loss is caused by a third party.

Question 3

A - Contribution

1. Provided there is no fraudulent intent, can the insured take out as many insurance policies as they wish?

Answer 3

Yes, however they can only recover the total amount of the loss sustained.

Question 4

A - Contribution

A1 Contribution Condition

1. Does contribution need to be stated in a policy document for it to exist? Why?

Answer 4

No, because it supports the principle of indemnity.

Question 5

A - Contribution

A1 Contribution Condition

2. Is the insured entitled to choose to claim the whole amount from one of the insurers?

Answer 5

Yes, it is the insurers responsibility to then recover appropriate shares from the other insurers.

Question 6

A - Contribution

A1 Contribution Condition

3. What does a Contribution Condition restrict the insurer’s liability to?

Answer 6

It’s rateable proportion or rateable share of loss.

Question 7

A - Contribution

A3 How Contribution arises

1. Under common law, what conditions must be satisfied before contribution arises?

Answer 7

Two or more policies exist

The policies cover a common insurable interest

The policies cover a common peril which gives rise to the loss

The policies cover a common subject matter

Each policy must be liable for the loss

Neither policy must contain a non-contribution clause

Question 8

B - Applying the Contribution Principle

B1 Rateable Proportion

1. What is the rateable proportion?

Answer 8

The share of any claim that an insurer pays when two or more insurers cover the same risk.

Question 9

B - Applying the Contribution Principle

B1 Rateable Proportion

2. What are the two ways to determine Rateable Proportion?

Answer 9

By sum insured

By independent liability

Question 10

B - Applying the Contribution Principle

B1A By Sum Insured

1. How is the rateable proportion of a loss calculated by sum insured?

Answer 10

Policy sum insured / Total sum of all policies x Loss

Question 11

B - Applying the Contribution Principle

B1A By Sum Insured

2. What type of situation is the by sum insured method used in?

Answer 11

Property policies not subject to average.

Question 12

B - Applying the Contribution Principle

B1B By Independent Liability

1. How does the by independent liability method calculate the amount payable?

Answer 12

Calculates the amount payable under each policy as if no other policy existed. The loss is then shared in proportion to the independent liabilities of the two policies.

Policy Sum Insured / Total Value at Risk x Loss

Question 13

B - Applying the Contribution Principle

B1B By Independent Liability

2. When is the method of by independent liability used?

Answer 13

Where property policies are subject to average
Where an individual loss limit applies with a sum insured

Question 14

B - Applying the Contribution Principle

B2A Non-Contribution clauses

1. How does a non-contribution clause modify a policy?

Answer 14

Means the policy would not contribute if there was another insurance policy in force.

Question 15

B - Applying the Contribution Principle

B1B By Independent Liability

2. Can Non-Contribution clauses be cancelled out?

Answer 15

Yes, if both policies have them non-contribution clauses they cancel each other out.

Question 16

B - Applying the Contribution Principle

B2B More specific insurance classes

1. What are the ways contribution can be restricted? Give an example.

Answer 16

Certain policies include clauses that restrict cover if a more specific insurance been arranged.

e.g. household contents won’t cover jewellery if separate jewellery insurance has been arranged.

Question 17

B - Applying the Contribution Principle

B2C Market Agreements

1. Whose policy will pay if a driver has a “driving other cars” extension and drives another person’s car which they are also insured to drive as a named driver under the owner’s policy?

Answer 17

The owners policy will pay for any claims.

Question 18

B - Applying the Contribution Principle

B2C Market Agreements

2. What does the Personal Effects Contribution Agreement (PECA) achieve?

Answer 18

States that when travel, all risks, household and the personal effects section of a motor policy overlap, insurers will not insist on applying contribution on modest amounts.

Question 19

C - Subrogation

1. Is subrogation a common law right?

Answer 19

Yes.

Question 20

C - Subrogation

2. Can insurers try to reduce losses by exercising recovery rights up to the amount that the insurer paid out?

Answer 20

Yes.

Question 21

C - Subrogation

3. Can the insured claim an indemnity payment from an insurer and then pursue further payment from a negligent third party?

Answer 21

No, this would result in a profit.

Question 22

C - Subrogation

4. What powers are granted to an insurer with a subrogation condition? What is the only limit?

Answer 22

The power to pursue subrogation claims before the claim is paid.

The insurer cannot recover from a third party before it has actually settled its own insureds claim.

Question 23

C - Subrogation

4. Motorbike crashes into your car, your insurer and their insurer both issue cheques to you. What can you do?

Answer 23

Can’t keep both cheques.
The third party cheque should go to your insurer by right of subrogation.

Question 24

D - Insurer’s Subrogation Rights

1. What happens if the insurer recovers more from the third party than was paid to the insured?

Answer 24

The insured is entitled to the difference.

Question 25

D - Insurer’s Subrogation Rights 2. What are the three ways Subrogation rights may arise?

Answer 25

Tort Contract Statute

Question 26

D - Insurer’s Subrogation Rights D1 Tort 1. What is tort?

Answer 26

A breach of the duty under common law to act in a reasonable way towards others.

Question 27

D - Insurer’s Subrogation Rights D1 Tort 2. How do Subrogation rights arise from tort?

Answer 27

If the insured suffers from a tort, they are entitled to compensation. Insurers assume the rights of the insured.

Question 28

D - Insurer’s Subrogation Rights D2 Contract 1. How do Subrogation rights arise by contract?

Answer 28

Breach of contract may entitle the insured to compensation from a third party. The insurer can assume these rights.

Question 29

D - Insurer’s Subrogation Rights D3 Statute 1. When must claims for riot, civil commotion and malicious damage be notified to the insurer?

Answer 29

Within seven days if the event.

Question 30

E - Insurers’ rights arising from the subject-matter 1. What happens if the insurer regards the property that is the subject matter of insurance as being beyond economic repair?

Answer 30

They may offer a total loss settlement.

Question 31

E - Insurers’ rights arising from the subject-matter 2. What typically constitutes ‘beyond economic repair’?

Answer 31

Repairs exceeding 60% of market value.

Question 32

E - Insurers’ rights arising from the subject-matter 3. When property is considered beyond economic repair there may be some residual value in the remaining property. What is this called? Who is entitled to it?

Answer 32

Salvage If the insurer make a full loss settlement they are entitled to the salvage.

Question 33

E - Insurers’ rights arising from the subject-matter 4. Are the insured always entitled to retain the salvage?

Answer 33

Yes, provided a suitable discount is made from the claim payment.

Question 34

E - Insurers’ rights arising from the subject-matter 4. What happens if jewellery is stolen, full settlement is paid, and the jewellery is later recovered?

Answer 34

The insured will be given the option to take back the jewellery in exchange for the return of the full value of the settlement.

Question 35

E - Insurers’ rights arising from the subject-matter 5. If salvage is retained by the insurer, who later sells it for a greater sum than the insurer originally assumed, is there an obligation to pass any profit on to the insured?

Answer 35

No, this is how rights from salvage differ from Subrogation rights.

Question 36

G - Precluded Subrogation Rights 1. When are insurers barred from exercising Subrogation rights, and when do they agree not to exercise them?

Answer 36

Insured has no rights - can’t pursue rights the insured isn’t entitled to. Benefit policies - not subject to indemnity, therefore the insurer can’t pursue. Subrogation waiver - usually designed to prevent the insurer from pursuing against a parent or subsidiary company of the insured. Negligent fellow employees - insurers have agreed not to pursue here.